We trust you all had an enjoyable Christmas break and we would like to wish all our clients a Very Happy New Year.
2014 investment review
The investment headlines have focused on volatile stock markets and the disappointing pace of global economic growth, seemingly confirmed by a steep decline in the oil price and inflation, so low it threatens to become deflation.
Actually investors should focus on what an extraordinarily benign year 2014 turned out to be.
Disappointments occurred because most major economies failed to grow at the rates expected of them – but at least they grew. This was the case in the US, the UK, Japan, Emerging Markets and even Europe.
Take the Eurozone for instance: of the 13 Eurozone countries that are significant in size, only two shrank last year (Finland and Italy) and even they shrank at a much slower rate than in previous years. Furthermore, for many large economies the shortfall was a result of events that won’t recur or, at least, are unlikely to recur in such a severe form. The disappointment in US economic growth could largely be explained by the severe winter weather early in the year.
Japan’s slowdown can be attributed mainly to the increase in Japan’s version of “VAT”, Germany’s partly to the impact of the Ukraine crisis and China’s slowdown appears to have been “permitted”, if not actually encouraged by, the government.
Even the broader Eurozone slowdown can be explained by policies that continued the austerity in government spending –policies that will not recur to such an extent in 2015.
We haven’t recovered from the Great Recession but the glass half-full says we are “recovering”.
Equities look attractive currently. Earnings expectations are still fairly robust. Whilst energy companies may struggle, other sectors should benefit from higher consumer demand and lower input costs.
Large cap UK companies have been suffering from a variety of issues over the past few years – supermarkets are seeing margins shrink, banks are seeing fines increase, and energy companies are coming to terms with a new world.
The UK economy has shrugged off a decline in confidence in the third quarter – with early indicators such as strong retail sales growth pointing to a continued consumer revival.
US equities continue to present the problem that the good growth momentum and solid future prospects already seem to be priced in; the S&P 500 is breaking new highs.
The European Central Bank website often breaks on the day of Mr Draghi’s policy statements – it cannot keep up with demand to stream the video conference! This is a pretty good indicator that Europe is waiting for further stimulus – which now appears closer than it ever has been.
The Japanese economy is still struggling to grow. However, material action was taken in the third quarter – the sales tax hike was deferred, the Bank of Japan began easing and the government pension fund doubled its allocation to equities.
Most of the Asian nations are commodity importers – which was one reason we prefer them ahead of Emerging Markets. Given the fall in oil, we continue to prefer that position, added to which we have the development of the Shanghai and Hong Kong stock exchange links – opening China up to foreign investment.
As central banks begin to embrace re-inflation, government bonds look susceptible. Certainly in many countries, further rallies are limited by yields already at all-time lows.
We are cautious on fixed income, preferring corporate and Emerging Market bonds to government issues.
On the inflation front the official figures have continued to surprise most forecasters on the downside. This is partly because most forecasters pay excessive attention to economic models that feature the output gap. This means that they rely on a theory that predicts rising inflation as soon as the gap between actual output and potential output is closed. In the view of economists, the return to 3% growth and the steady falls in the unemployment rate imply an economy with only modest headroom for expansion. In their view, the output gap is near to closure. Similarly they presume that when unemployment hits some level, wage inflation will begin to rise steeply, however with a background of abnormally low growth of money and credit, we would expect lower than consensus rates of inflation.
2015 will see the implementation of the first stage of the Care Act in April with the Information and Advice requirements for local authorities coming into force together with the new Universal Deferred Payment scheme. Depending on the election results, we will also see major changes to the way in which personal pension benefits can be accessed and all of these issues will increase the need for advice.
SOLLA accredited advisers intend to be at the forefront of that advice provision and we very much look forward to working to meet the needs of the consumer in later life.
This article represents a personal view from Adrian Bell and is based on current financial news and events around the world. Its content should not be used for investment purposes and you should contact an independent financial adviser before making any investment or financial decision.